Consider the goods market model where consumption is given by: C = co + C1(Y investment is given by: I = b, + bịY – bzi, and tax is given by T = to + t,Y. G is government spending and is given. Assuming co = 100, cq = 0.6, bo = 150, bị = 0.2, = 0.3, and b, = 1,000. Keeping all other things constant, what will be the change in the %3D %3D %3D t1 equilibrium output (Y*) in the goods market if the interest rate, i, is reduced by 5% (round the nearest decimal point)? Da. All of the answers here are incorrect O b. $327.4 Dc S86.2 Od.$125.0 De. S250.0
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- In a simple model without government spending or taxation, if C = a +bY where C is consumer spending and Y is GDP which of the following statements are correct? (Note that the algebra is deliberately written differently from the lecture notes to test your understanding!) Note that some of these questions require you to have read relevant sections of Core Unit 13. Select one or more: O a. a is known as the marginal propensity to consume Ob.a is the level of consumption when Y is zero c. b is known as the marginal propensity to consume O d. b is known as the average propensity to consume Oe. The consumption function implies that if GDP is zero, consumption is zero O f. If there is an increase in consumers who engage in "consumption smoothing", this will cause an increase in a and a decrease in b g. If there are more credit-constrained consumers in the economy, this will cause the marginal propensity to consume, to fall O h. If consumption-smoothing consumers become more optimistic about…Imagine this economy has a 10% tax on income. The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 Now we have to take that tax into account. Here is a way to think about it: Look at the consumption function. It says if you give me one more dollar of income I will spend 80 cents of it (mpc = 0.8). BUT I can only spend what I receive. I can only spend my after-tax or disposable income. With a 10% tax, I don't receive Y I receive 90% of Y or Y*(1-t) where t = 10% or 0.1. Let's define disposable income as Yd where Yd = Y*(1-t). Therefore we restate our consumption function as C = k + cYd Now we have, in this case, C = k + cYd or C = 3 + 0.8Yd or C = 3 + 0.8*(Y*[1-0.1]) or C = 3 + 0.72Y. Now what is the equilibrium GDP? Give the answer to ONE decimal place.The economy is described by the following functions: C = C+c.YD Tx = t.Y Tr Tr I %3D G = Nx = Nx where t is the tax rate. Note the difference with the setup derived in class: here, the amount of taxes collected depends positively on the gross income. • Q1. Express equilibrium output as function of other variables • Q2. Find the multiplier associated with government purchases. How does this multiplier compare with that obtained in class (i.e. for a model with lump-sum taxes?)
- The President of Westeros hires you as an economic consultant. He is concerned that theoutput level in Westeros is too high and that this will cause prices to rise. He feels that it isnecessary to reduce output by $10 billion. He tells you that the MPC in Westeros is 0.6.Which of the following would be the best advice to give to the Westeros president?A) reduce government purchases by $4 billionB) increase taxes by $10 billionC) reduce government purchases by $10 billionD) increase taxes by $2.5 billionAn economy is described by the following equations: C = 500 + 0.85(Y – T), Cis consumption, Y is income and T is taxation M=0.05(1-t)Y imports IP = 1500, planned investment G = 400, government spending T = tY, t = 0.2 is the marginal tax rate X = 1200, X is exports I. The equilibrium level of output for the above economy is 22500 Do NOT include any letters, spaces or symbols (e.g. "$" or ",") in your answer. II. The multiplier for this economy is equal to 6.67 (Round to 2 decimal places) III. Suppose that, in this economy, there is an exogenous decrease in spending of 180. This economy will now be experiencing expansionary gap. Possible answers (write ONE of the following only): "a contractionary" OR "an expansionary". IV. If the potential output of the economy is 10,000, the size of the output gap arising from part III will be Do NOT include any letters, spaces or symbols (e.g. "$" or ",") in your answer. V. If the Okun's Law beta parameter is 2, the cyclical unemployment rate…C = 450 + 0.4Y I = 350G = 150X = 70Z = 35 + 0.1Y T = 0.15YYf = 1550Calculate the tax revenue to the government of this country when the economy (2) remains in equilibrium.Calculate what the new equilibrium income should be if the government of this (6) country decides to cancel all taxes, implying the tax rate would now be 0%.Before the government decreased the tax rate, how much of government spending was required to bring the economy to full employment?
- The economy is described by the following functions: Shown in Picture where ?t is the tax rate. Here, the amount of taxes collected depends positively on the gross income. Find the multiplier associated with government purchases. How does this multiplier compare with a model with lump-sum taxes? Why is it lower?Q2: 5. Suppose the following information represents current economic conditions and behavior in some cconomy: C= 400 + .75YD where Yp = Y - T, T = 400 and Y = 2000. a. First, graphically depict the above consumption function in C - Yp space (with C on the vertical axis and Yp on the horizontal axis). What does the vertical intercept represem? Explain. What is the slope of this consuniption function? Explain. With Y = 2000, what is the level of consumption for this cconomy? Yp b. Assuming that Y does not change, graphically illustrate (in the above graph), and expluin the effects of a reduction in the marginal propensity to consume to .5. Calculate what happens to the level of consumption.In a simple model without government spending or taxation, if C = a +bY where C is consumer spending and Y is GDP %3D which of the following statements are correct? Select one or more: O a. a is known as the marginal propensity to consume b. a is the level of consumption when Y is zero c. b is known as the marginal propensity to consume d. b is known as the average propensity to consume e. The consumption function implies that if GDP is zero, consumption is zero f. If there is an increase in consumers who engage in "consumption smoothing", this will cause an increase in a and a decrease in b g. If there are more credit-constrained consumers in the economy, this will cause the marginal propensity to consume, to fall O h. If consumption-smoothing consumers become more optimistic about the future, a will increase.
- Assume that the consumption function is given by C = 150 + 0.85(Y – T)and the tax function is given by T = t0 + t1Y where C = Consumption, Y = Total output/income, t0 = Autonomous/fixed tax and t1 = Tax rate. If t0increases by 1 unit, then explain whether consumption will be increased or decreased, and how much?Hi, could you help me solve this problem? Desired demand is DD = C +Ip +G+NX, where consumption C = a+b(Y −T), Ip is planned investment, G government consumption and T net taxes. Y denotes domestic output. Net exports are NX = cY f − dY , where Y f is foreign output (output of export countries). Parameters a, b, c, and d are all strictly positive and b > d. In equilibrium, Y = DD. By how many units (e.g. billions of euros) does domestic equilibrium output increase if go- vernment consumption is increased by 1 one unit? (Hint: solve for equilibrium Y as a function of G.) How and why does international trade affect the fiscal multiplier?6. Assume a closed economy with exogenous investment I and government spending G. The consumption function is as follows: C = a + bYa where Ya is households' disposable income. But instead of a head tax the government levies a proportional income tax, with the income tax rate given by t where 0 < t < 1. a) What is the new expression for disposable income? b) What is the new expression for the consumption function? c) What is the equilibrium level of output Y? d) What is the government spending multiplier in this case? (Hint: It's the derivative of income Y with respect to G.) e) Is this multiplier smaller or larger compared with the multiplier with a simple head tax T?